Welcome back! Its
been a good 4 months now since we last interacted. I'm afraid I am pretty much
responsible for it. A lot has happened in these past four months, the most
significant of which was Legion opening its Bangalore Office. More on that
later. For now, its back to the Cornerstones of Commercial Real Estate.
Commercial Real Estate, as a fragment of the Real
Estate industry, has evolved tremendously over the past two decades. Ever since
2004, the country absorbs close to 40 Million square feet every year with the
major 6 cities namely Mumbai, NCR, Bengaluru, Chennai, Hyderabad and Pune
accounting for as high as 90-95%. The super 6 as I’d like to call them have
grown primarily owing to two reasons. The first reason is demand from
occupiers/tenants, large and small; the second reason being quality and scale
of Commercial Real Estate Development that enters these market every year. We
have already dwelled upon the Occupiers aspect in the previous article so now let
us examine the 2nd of the Cornerstones of Commercial Real Estate i.e
Developers.
Developers concern themselves with the supply side of
the business. A developer’s primary external objective is to either create
demand or cater to the demand that is generated by occupiers. Their business is
time, risk and capital intensive. Developing a project is like synchronizing an
orchestra. Every note has to be in place for the end product to appeal to the
listener. In more ways than one, they
shape a city’s skyline. We would like to categorize developers in the following
generic yet effective manner:
1) The
Price Makers: The
price makers are generally the first movers in a particular city/area/location.
They set the benchmark for other players to enter the market not just from a
price perspective but also from a quality perspective. It is a known fact that
almost every established location within the country was developed by Price
Makers, be it Whitefield and ORR in Bangalore, OMR and Guindy in Chennai,
Madhapur and Gachibowli in Hyderabad or Kharadi and Hinjewadi in Pune or DLF
Gurgaon.
What makes them Price Makers in the first
place? The answer is not simple. It is a combination of the following:
a) Risk
appetite : The ability
to place their bets on relatively unknown locations requires a degree of risk
that smaller Developers are generally incapable of taking. Price Makers do not
only develop the project. In many cases, they partner with the local bodies to
develop infrastructure in and around the area including Roads, Power, Water,
Telecom etc. They land bank extensively and this in turn presents an ideal
opportunity when they sense demand for space in the particular area
b) Foresight: Price Takers have the foresight to
determine if their risk is likely to pay off. This foresight is the result of
many years of experience across diverse locations as well a keen understanding
of the laws of the land. Add to this modern research and analytics and this only
makes their decisions more complex.
c) Financial
Muscle: Not only does
the developer require Financial muscle to see through the development of the
project, many of which run into years, they also have the sustaining power to
see through the idiosyncrasies of Business Cycles as well as hold onto land
banks until an opportunity presents itself.
d) Statutory
Know-how: They have
the know-how when it comes to obtaining approvals from the various statutory
bodies. This is particularly important as many of the approvals can run into
months (sometimes years). What appears to be a minor violation can snowball
into something that can delay the overall project for months.
e) Technical
excellence: Having
succeeded using a tried and tested formula of development that adheres to
stringent Environment, Health and Safety Norms, the Price Makers have their
teams in place to execute projects with remarkable ease.
f) Right
price for the right market: Price Makers have a wealth of data through primary and secondary
research which enables them to determine the right price and the right product.
These research reports are quite exhaustive and provide the Price Makers
analyses on Demand, Supply, Absorption and Vacancy in the nearby Micro-markets
along with a glimpse on the short-term as well as long-term infrastructure
developments that would determine the viability of developing a project.
2.
Price Takers: What we
refer to as Price takers are Developers who are considerably less risk averse. They
are a combination of Large and mid-size developers. Let’s deconstruct them in
the same manner as we did for the Price Makers:
a) Risk
Appetite: Price takers
are relatively more risk averse. They are content with following the Price
Makers in the respective market. Although they may have the financial depth to
sustain themselves through varying business cycles, their aversion to risk
makes them less leaders and more followers.
b) Foresight: Price Takers are quick to acknowledge the
potential of a certain location however logic and conservation precede
foresight and ambition. They limit the extent to which their foresight affects
their decision and are more prone to be led by extensive research and analyses.
c)
Financial Muscle: There is absolutely nothing to suggest that Price
Takers do not have the same depth as Price Makers. In fact, I wouldn’t hesitate
in saying that some of them have even deeper pockets by having access to
international funds. They also have the sustaining power to see through
multiple business cycles. Unlike Price Makers who generally implement and
develop large scale projects, Price Takers can come in various sizes. They can
develop Large projects (500,000 sft +)as well as Medium Projects (200,000
sft-500,000 sft).
d)
Statutory Know How: In
this aspect as well, there is little or no difference between Price Makers and
Price Takers. Price Takers are very well aware of the statutory norms of a
particular City/Location.
e)
Technical Excellence: Here
again, there is little or no difference between the two. Although more often
than not, Price Makers are the ones that are benchmarked, Price Takers are
equally capable of delivering as good if not better specifications
f)
Right Price for the Right Market: Price Takers have a relatively shorter
learning curve as they already have the benefit of observing and learning form
the Price Makers experience and mostly at their cost. They are far more
conservative in their pricing.
3.
Price Breakers: Every
market has these. They are bane of the Price Makers and the Price Takers. They
enter a market with a ‘value proposition’ that is primarily driven by price and
less so by quality. They are the opportunists who will not shy away from
capturing market share. They are often scoffed at by their more illustrious
fraternity however remain unaffected. They move swiftly and have no regard or
respect for market benchmarks. How do they fit in? Let’s take a look:
a)
Risk Appetite: Price Breakers play to capture market share at the earliest available
opportunity. As mentioned above they are opportunists. Unlike Price Makers and
Price Takers their fleet-footedness allows them to develop smaller projects
that may not pay as much attention to quality or detail thereby making them relatively
less risky. They enter when basic infrastructure is already in place.
b)
Foresight: They are not known for their foresight. Instead, they
rely on the foresight of their more illustrious counterparts. Price Breakers
seldom bother themselves with foresight. They are too busy delivering low cost
and low value projects. This rather annoying quality of theirs makes it
difficult for the Price Makers and Price Takers to sustain their price points.
c)
Financial Muscle: Price Breakers may be relatively smaller than
Price Makers and Price Takers, but their quick turnaround time and cost
effective commercials ensure that they exit their projects quickly. They do not
believe in investing heavily in the overall development of a micro-market and
are happy to live off the other two.
d)
Statutory Know-how: Here again, there is no real difference
between all the three categories.
e)
Technical Excellence: If there ever is a chink in their armor,
technical excellence is it. Price Breakers are more likely to be caught off
guard when it comes to adhering to absolutely stringent Environment, Health and
Safety Norms. This is not to say that they are unsafe or non-compliant. It just
reflects on the fact that many of these developments will not suffice the needs
of Multi-nationals and they are well aware of that. They will fulfil the
minimum requirements of a building but not the optimal requirements.
f)
Right Price for the Right Market: Price Breakers are not concerned with the
market benchmarks. They price their product based on their own internal
calculations and the focus is clearly on completing the project and exiting.
They are very often mocked at and scoffed at by Price Makers and Price Breakers
yet they remain unperturbed.
 |
| A Pictorial perspective |
I do hope this article gives you some insight about
Developers. They are an integral part of the three cornerstones and without
them Commercial Real Estate wouldn’t exist. In the next article, we shall complete the COrnerstone series by understanding the third but by no means the least- The Investor.
Hope you have had a memorable 2014. Time to now look forward to the 2015 with gusto. All of us at Legion wish you a Merry Christmas and a happy New Year. See you all in 2015.
